Author: ColinTwiggs

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S&P 500 hesitates at the last hurdle

Several weeks ago I wrote that the S&P 500 would struggle to break the band of resistance at 2100 to 2130. Tuesday’s strong blue candle made me hesitate but sellers showed up on Wednesday and restored my faith. Money Flow is declining and reversal below 2040 would confirm another correction. But breakout above the descending trendline on 21-day Twiggs Money Flow would still warn that all bets are off.

S&P 500 Index

A CBOE Volatility Index (VIX) at 15 indicates that (short-term) market risk is low.

S&P 500 VIX

We have reduced cash levels in our S&P 500 momentum portfolio as long-term risk measures have improved but there are still only 4 stocks (out of 500) that meet our selection criteria!

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Four key takeaways for investors from the big four bank earnings season

Good article from James Eyers at The Age:

1) Bank margins are under pressure

Over the first half, bank net interest margins expanded by two basis points, but “this was weaker than anticipated as front book competition offset much of the mortgage repricing benefit,” said UBS analyst Jonathan Mott…..

2) Bad debts are rising, but off a low base and in isolated areas

It would seem that asset quality has gone past its low trough; most analysts are expecting banks to report higher impairment expenses in the second half after large ‘single name exposures’ led to increases in impaired assets and provisions in the first half…..

3) Dividends are under pressure

Apart from ANZ, which surprised the market on Thursday when it cut its interim dividend 7 per cent…. payout ratios continued to creep higher. Analysts think NAB is the most likely bank to follow ANZ and to cut its dividend…..

4) Stock prices will remain volatile

Despite the week of disclosures and presentations for the banks, there are still a lot of mixed messages and issues that remain uncertain for the banks, which will compound volatility as investors shift positions on the sector.

The analysts took different core messages from each bank during last week. Mr Martin says ANZ’s was the best result for costs, NAB’s was the best for revenue growth, while Westpac was the best result for provisioning by taking more upfront. While the results showed consumer banking earnings to be strong, institutional banking earnings were very weak.

“The sector outlook will remain difficult in the second half,” says Goldman’s Mr Lyons.

Australian banks face three major headwinds. Personal credit is shrinking, reflecting consumer caution, while credit to business and housing has been buoyed by low interest rates.

Australia Credit Growth

But this is likely to slow as capital ratios increase.

Australia Bank Capital Ratios

And pressure on interest margins continues.

Australia Bank Net Interest Margins

Source: Four key takeaways for investors from the big four bank earnings season

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Why Every Government Will Increase Taxes on Superannuation

From Sam Volkering, 6 May 2016:

The fallout from this week’s federal budget continues. As I noted yesterday, it was a pretty weak budget all things considered. Nothing of any substance. Nothing to grab the reigns of the country and ride it to a sunny future.But there were some interesting tidbits in there — in particular some changes to the much-beloved superannuation system. An article in the Australian Financial Review yesterday caught my eye about said changes. The title reads: ‘AFR readers dismiss super caps as disgrace’.

Thems fightin’ words if you ask me. But I can see where the AFR readers are coming from. After getting a cushy ride with super over the last decade some people are asking, ‘why now?’If you had a wonderful tax-free environment to look forward to, and an easy way to pay considerably less tax, you’d be a tad annoyed too if it was taken away.

No wonder the (almost retired) masses are crying, ‘why makes changes now, right when it’s going to impact us? Why makes changes at all?’Of course, the reality is that, any time there’s a change to the super system, some segment of the public will be left worse-off than others.

If changes to superannuation caps weren’t this year, they’d be next. And the next crop of retirees would be saying the same thing, ‘Why now? Why us?’

But if you delay change every time someone asks ‘what about us?’ then nothing would ever change. Sometimes you’ve just got to suck it up and deal with it. Now that might sound a tad harsh. But most people forget that the superannuation system in Australia has done a lot of people a world of good. Well, mainly the baby boomers, in any case.

In reality, superannuation is the beast that got out of control.The stats don’t lie — but they’re a little unbelievable

Let’s take a quick look at the latest ATO tax statistics from the 2013/14 financial year (these are the most current). I touched on some other ATO statistics in yesterday’s Money Morning when looking at the number of people earning big bucks in Australia.

Today, though, I had a trawl through the ATO’s superannuation tax stats; in particular those relating to self-managed super funds (SMSFs).

Now, I appreciate the stats here are a couple of years old…but they’re not far off.Nonetheless, in 2013–14, there were 465,946 SMSFs. Compare this to 2009–10 when there were just 208,285. That’s a 123% growth in just a few years.In the 2009–10 financial year, those 208,285 SMSFs paid net tax of $2.19 billion. That was paid on taxable income of $14.67 billion. For simplicity’s sake, that works out at an average of $10,517 in taxes paid per fund.

Also, with some basic math, that gives an overall tax rate of just 14.92%.In 2013–14, 465,946 SMSFs paid net tax of $2 billion. And that was on taxable income of $13.49 billion. That works out to around $4,298 in tax per fund…Let’s also add the fact that every year the average balance of SMSFs continues to grow. In the 2009–10, average assets per SMSF was $811,595. In 2013–14, it was a whopping $1.06 million.

Say what? That doesn’t seem right does it? No, it doesn’t. But the stats don’t lie.Let’s run through that again: 123% more SMSFs from 2009–10 to 2013–14. And 31.3% growth in average assets per SMSF from 2009–10 to 2013–14. Yet…they paid less tax and made less money than three years prior.Oh dear. If you’re the government, that’s not how the system was supposed to work.

Think about superannuation as the government’s own stockholding. In fact, view the SMSF pool as one big company. Let’s give it the stock ticker ‘SMSF’.The government owned 208,285 shares in this ‘SMSF’ in 2009–10. And it delivered $10,517 per share. At this point the ‘SMSF’ market cap was about $189 billion.

Fast forward a few years and the government now owns 465,946 shares in ‘SMSF’. The market cap is now around $496 billion. Now, if the return (tax paid) to the government was even remotely close to what it was in 2009–10, then the government might be looking at net tax receipts of, say, $4.9 billion.

But that’s not the case now, is it? Nope. The stock now returns $4,298 per share. The stock has grown significantly, but the returns have not. Tax receipts are a trickle over $2 billion.

If you look at it from a purely investment point of view, the government’s return has been abysmal. Tax per fund has fallen by over 59%. That’s a poor return. If they could they’d probably sell this dud…But they can’t. They can’t get rid of it. So they can only do what they can do. And that’s change it.

After all, they’re trying to get better return on their investment….

What makes this interesting too is that, from 2012, funds in ‘full pension phase’ didn’t even have to report income on the SMSF return. That means actual income was likely considerably higher. But that means little really because, for the government, it’s about how much tax revenue they can generate from super.

If anything, with an increasing number of retirees and SMSFs in ‘full pension phase’, there’s an even bigger reason to start whacking on more taxes.

That’s exactly why this government — and every government from this day forth — will try to plunder the superannuation pool. They simply have to.

They have to tame the beast and get it to pay them back.

It’s an ‘own goal’ really. They’ve put all this work into superannuation. No doubt with the long term view it would pay them back. But it’s bit them on the backside. And keeping it the way it is, or making it a more tax-free environment is a dud economic strategy to follow.

That’s why you shouldn’t be surprised that they’re doubling tax on high income earner contributions… and why you expect contributions caps…and why more restrictions and regulations are coming.

You should expect more taxes. Expect more restriction. Expect the worst. The new reality is the super-gravy train is coming to a halt. The party’s over people.

From my view, the worst is yet to come. The whole $2 trillion beast that is the super system is out of control.

It’s a big, fat juicy tax target. And it might be the only way the country ever gets close to an economic surplus in the next decade or two…or three.

What can you do about this approaching storm? Well, what do you think? Be smart, hedge your bets. Something’s going to happen, and it’s coming fast. So you can sit idly by and watch it unfold. Or get ahead of the game and look at other ways to grow and protect your money for the most important person — you.

Regards,

Sam Volkering,

Editor, Australian Small-Cap Investigator

Ed note: This article was originally published in Money Morning.

Can’t see how government ever thought that creating a tax-free environment for super funds in pension mode was sustainable.

Source: Why Every Government Will Increase Taxes on Superannuation

Hat tip to Frank Aquino.

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Stan Druckenmiller: This Is The Endgame | Zero Hedge

Hedge fund legend Stan Druckenmiller, founder of Duquesne, addressing the Sohn Conference:

….The Fed has no end game. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term. In doing so, they are enabling the opposite of needed reform and increasing, not lowering, the odds of the economic tail risk they are trying to avoid. At the government level, the impeding of market signals has allowed politicians to continue to ignore badly needed entitlement and tax reform.

Look at the slide behind me. The doves keep asking where is the evidence of mal-investment? As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened. Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for 2 years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over 2 years. Again, the current 5-year divergence is unprecedented in financial history!

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments….

Source: For Stan Druckenmiller This Is “The Endgame” – His Full ‘Apocalyptic’ Presentation | Zero Hedge

Hat tip to Houses & Holes at Macrobusiness.

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The real reason for low savings rates

Also from Michael Pettis:

This is the great irony of the global financial crisis. China, Russia, and France want to lead the charge to strip the US of its exorbitant privilege, and the US resists. And yet if the US were to take steps to prevent foreigners from accumulating US assets, the result would be a sharp contraction in international trade. Surplus countries, like Europe and China, would be devastated, but the US current account deficit would fall with the reduction in net capital inflows. As it did, by definition the excess of US investment over US savings would have to contract. Because US investment wouldn’t fall, and in fact would most likely rise, US savings would automatically rise as lower US unemployment caused GDP to grow faster than the rise in consumption.

But what about the extremely low savings rates in the US. Don’t they prove, as Yale University’s Stephen Roach has often pointed out, that the US is savings-deficient and relies on Chinese and European savings to fund US investment, or at least the US fiscal deficit, because the US consumes beyond its means?

“What the candidates won’t tell the American people is that the trade deficit and the pressures it places on hard-pressed middle-class workers stem from problems made at home. In fact, the real reason the US has such a massive multilateral trade deficit is that Americans don’t save.”

This is one of the most fundamental errors that arise from a failure to understand the balance of payments mechanisms. As I explained four years ago in an article for Foreign Policy, “it may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.” As counter-intuitive as it may seem at first, the US does not need foreign capital because the US savings rate is low. The US savings rate is low because it must counterbalance foreign capital inflows, and this is true out of arithmetical necessity……

Source: The titillating and terrifying collapse of the dollar. Again. | Michael Pettis’ CHINA FINANCIAL MARKETS

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The titillating and terrifying collapse of the dollar. Again. | Michael Pettis

Michael Pettis explains why the US dollar as reserve currency is a burden rather than a privilege for the US:

Historically, neither Europe nor Japan, and certainly not China, have been willing to permit foreigners to purchase significant amounts of government bonds for reserve purposes. When the PBoC tried to accumulate yen three years ago, for example, rather than welcome the friendly Chinese gesture granting the Bank of Japan some of the exorbitant privilege enjoyed by the Fed, the Japanese government demanded that the PBoC stop buying. The reason is because PBoC buying would force up the value of the yen by just enough to reduce Japan’s current account surplus by an amount exactly equal to PBoC purchases. This, after all, is the way the balance of payments works: it must balance.

What is more, because the current account surplus is by definition equal to the excess of Japanese savings over Japanese investment, the gap would have to narrow by an amount exactly equal to PBoC purchases. Here is where the exorbitant privilege collapses. If Japan needs foreign capital because it has many productive investments at home that it cannot finance for lack of access to savings, it would welcome Chinese purchases. PBoC purchases of yen bonds would indirectly cause productive Japanese investment to rise by exactly the amount of the PBoC purchase, and because the current account surplus is equal to the excess of savings over investment, the reduction in Japan’s current account surplus would occur in the form of higher productive investment at home. Both China and Japan would be better off in that case.But like other advanced economies Japan does not need foreign capital to fund productive domestic investment projects. These can easily be funded anyway. In that case PBoC purchases of yen bonds must cause Japanese savings to decline, so that its current account surplus can decline (if the gap between savings and investment must decline, and investment does not rise, then savings must decline). There are only two ways Japanese savings can decline: first, the Japanese debt burden can rise, which Tokyo clearly doesn’t want, and second, Japanese unemployment can rise, which Tokyo even more clearly doesn’t want.

There is no way, in short, that Japan can benefit from PBoC purchases of its yen bonds, which is why Japan has always opposed substantial purchases by foreign central banks. It is why European countries also strongly opposed the same thing before the euro was created, and it is why China restricts foreign inflows, except in the past year when it has been overwhelmed by capital outflows. The US and, to a lesser extent, the UK, are the only countries that permit unlimited purchases of their government bonds by foreign central banks, but the calculus is no different.

It turns out that foreign investment is only good for an economy if it brings needed technological or managerial innovation, or if the recipient country has productive investment needs that cannot otherwise be funded. If neither of these two conditions hold, foreign investment must always lead either to a higher debt burden or to higher unemployment. Put differently, foreign investment must result in some combination of only three things: higher productive investment, a higher debt burden, or higher unemployment, and if it does not cause a rise in productive investment, it must cause one of the other two.

The two conditions under which foreign investment is positive for the economy – i.e. it leads to higher productive investment – are conditions that characterize developing economies only, and not advanced countries like Japan and the US. These conditions also do not characterize developing countries that have forced up their domestic savings rates to levels that exceed domestic investment, like China.

Source: The titillating and terrifying collapse of the dollar. Again. | Michael Pettis’ CHINA FINANCIAL MARKETS

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IMF warns about Chinese debt

From FT (via the Coppo Report at Bell Potter):

China’s leaders need to look beyond the current solutions being floated to tackle the country’s mounting corporate debt problems and come up with a bigger plan to do so, the International Monetary Fund’s top China expert has warned. The IMF has been expressing growing concern about China’s debt issues and pushing for an urgent response by Beijing to what the fund sees as a serious problem for the Chinese economy. It warned in a report earlier this month that $1.3tn in corporate debt — or almost one in six of the business loans on Chinese banks’ books — was owed by companies who brought in less in revenues than they owed in interest payments alone. In a paper published on Tuesday, James Daniel, the fund’s China mission chief, and two co­authors, went further and warned that Beijing needed a comprehensive strategy to tackle the problem. They warned that the two main responses Beijing was planning to the problem — debt­-for­-equity swaps and the securitization of non­performing loans — could in fact make the problem worse if underlying issues were not dealt with. The plan for debt­ for equity swaps could end up offering a temporary lifeline to unviable state­ owned companies, they warned. It could also leave them managed by state­ owned banks or other officials with little experience in doing so.

Bad debt is bad debt …… and nonproductive assets are nonproductive assets. Financial window-dressing like securitization or debt-for-equity swaps will not change this. The assets are still unproductive. Effectively, China has to stump up $1.3 trillion to re-capitalize its banks. And that may be the tip of the iceberg.

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Carl Icahn warns of ‘day of reckoning’

Reuters:

Billionaire activist investor Carl Icahn ….. said he was “still very cautious” on the US stock market and there would be a “day of reckoning” unless there was some sort of fiscal stimulus.

…..Icahn, who owned 45.8 million Apple shares at the end of last year, said China’s economic slowdown and worries about how China could become more prohibitive in doing business triggered his decision to exit his position entirely.

Icahn is right about fiscal stimulus. Easy money policies implemented by central banks around the globe are an effective tool to stem the flow when financial markets are hemorrhaging but they are not a long-term solution. The only effective means of halting the long-term, downward spiral is fiscal stimulus.

The biggest obstacle to fiscal stimulus is resistance to increasing public debt. There is good reason for this as wasteful deficit spending in the past has left taxpayers with a massive debt burden and nothing to show for it. Governments ran deficits to cover a shortfall in tax revenue or an increase in expenditure without thought as to how the debt would be repaid.

But if debt is used to fund investment in productive infrastructure, revenue from the asset can be used to pay off the debt over time, or the asset can be sold to repay the loan. There is an immediate double benefit to government, with increased wages — directly from infrastructure projects and indirectly from suppliers of goods and services — boosting tax revenues while also saving on unemployment benefits. The long-term benefit is retaining and developing skills in the economy that would otherwise be lost through long-term unemployment.

Politicians have a poor track record, however, when it comes to selecting productive infrastructure projects. Instead favoring projects that will garner the most votes. This can be improved by setting up a non-partisan planning and selection process with a long time horizon. Also partnership with the private sector would eliminate projects with weak or unpredictable revenue streams.

Partnerships with the private sector also help to leverage funds raised through public debt, limit cost overruns and contain on-going running costs. But both sides must have skin in the game.

To be effective, infrastructure programs must address the long-term needs of the economy and should be carried out on a broad, even global, scale to re-invigorate the faltering global economy.

Source: Carl Icahn sells entire Apple stake on China worries, warns Wall Street of ‘day of reckoning’

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Plenty of bottom signals

Global

Dow Jones Global Index is headed for a test of resistance at 320 after penetrating its descending trendline. Respect of 320 is likely but a bottom is forming and a higher trough would suggest an inverted head-and-shoulders formation. 13-Week Twiggs Momentum recovery above zero is bullish but another low peak would indicate that bears still dominate.

Dow Jones Global Index

North America

The S&P 500 continues to test the band of resistance at 2100 to 2130. Money Flow remains bullish but I expect stubborn resistance at this level, further strengthened by poor quarterly results, so far, in the earnings season.

S&P 500 Index

A CBOE Volatility Index (VIX) at a low 14 indicates that (short-term) market risk is low. Long-term measures are also starting to ease but we maintain high cash levels in our portfolios.

S&P 500 VIX

Canada’s TSX 60 is headed for a test of resistance at 825. Penetration of the descending trendline suggests that a bottom is forming. Resistance is likely to hold but an ensuing higher trough would be a bullish sign. Rising 13-week Twiggs Momentum is encouraging but a low peak above zero would indicate that bears still dominate.

TSX 60 Index

Europe

Germany’s DAX broke resistance at 10000 and is headed for a test of the descending trendline. Rising Money Flow indicates medium-term buying pressure. Retreat below 10000 would warn of another decline.

DAX

* Target calculation: 9500 – ( 11000 – 9500 ) = 8000

The Footsie is headed for a test of 6500. Rising Money Flow suggests decent buying pressure. Respect of resistance is likely but a bottom is forming and an ensuing higher trough would suggest a primary up-trend.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index retreated below 3000. Breach of medium-term support at 2900 would warn of another test of primary support at 2700. Rising Money Flow suggests that breach of primary support is unlikely.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index broke resistance at 17000, a higher trough signaling a primary up-trend. Expect retracement to test the new support level at 17000. Rising Money Flow confirms buying pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is testing its upper trend channel at 26000. Penetration of the descending trendline would suggest that a bottom is forming. Respect, indicated by reversal below 25000, would warn of another test of primary support.

SENSEX

* Target calculation: 23000 – ( 25000 – 23000 ) = 21000

Australia

A sharp fall in the Australian Dollar as result of record low inflation numbers may precipitate some selling by international buyers. Further weakness in iron ore would impact both the ASX and the Aussie Dollar.

The ASX 200 has also penetrated its descending trendline, suggesting that a bottom is forming. But bearish divergence on 13-week Money Flow warns of selling pressure. Retreat below 5000 would warn of another test of primary support at 4700.

ASX 200

* Target calculation: 4700 – ( 5200 – 4700 ) = 4200

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